Economic analysis and realization mechanism design for full cost of coal mining

Transcription

1 Procedia Earth and Planetary Science 1 (2009) Procedia Earth and Planetary Science The 6 th International Conference on Mining Science & Technology Economic analysis and realization mechanism design for full cost of coal mining Li Ai-bin a,b, Zhou Min a, Lu Ming-yin b, * a School of Management, China University of Mining and Technology, Xuzhou , China b The State Key Laboratory of Coal Resources and Mine safety, China University of Mining and Technology, Xuzhou , China Abstract Att present China s coal price can t reflect the true cost of coal resources and the value of resources isn t adequately compensated, for which absence of full cost of coal resources is mainly responsible. Based on the discussion of constitutes of coal full cost, this paper analyzes the economic behavior of coal mining using the theoretical methodology of economics and comes up with the policy mechanisms for the realization of full cost of coal resources. The results show that full cost of coal is a key factor to influence the price of coal and the optimal allocation of resources, and market pricing system and government supervision mechanism are necessary to ensure the realization of full cost of coal resources. Keywords: coal resources; price; full cost; realization mechanism 1. Introduction Coal is the primary energy of China, accounting for around 70 percent of China s primary energy production and consumption. The 2008 National Coal Industry Statistics Express released by Chinese Coal Industry Association shows that China s coal output in 2008 reached 2.7 billion tons and according to experts prediction, the proportion of coal will account for 50% in China s energy structure in Therefore, sustainable development of the coal industry has an important supportive and indemnificatory significance for keeping and enhancing the sustainable development of the national economy. Externality, which refers to the influence caused by behavior of businesses or individuals to other businesses or individuals, is the essential economic characteristic related with the issue of resources and environment. Coal mining has an obvious effect of negative externalities, mainly reflected as environmental pollution in the mining areas and waste of resources as well as the difficulty in keeping production safety and quantifying management. As a result a large proportion of coal cost is spent as external cost to preserve the resources, protect the environment and keep the safety. At present in China s coal industry, the cost calculation of coal mining only count the direct costs while excluding the external costs of coal mining, consequently it does not reflect the whole, real cost of coal * Corresponding author. Tel.: ; fax: address: xkblab@cumt.edu.cn Published by Elsevier B.V. Open access under CC BY-NC-ND license. doi: /j.pro eps

2 mining, so coal prices do not reflect the true value of coal. As a result, the State and coal enterprises have had to bear the external costs of coal mining. On the other hand, inadequate investment in the safety and environment management causes large sums of loans. Furthermore, it brings on low wages of coal industrial workers, the insufficient compensation of labor value and inadequate safeguard in safety and security. On all accounts, the healthy development of coal industry is severely restricted. Thus, it is rather important to scientifically define the full cost constitutesof coal mining for supervising coal prices and realizing the sustainable development of the coal industry in China. Recently a great many scholars and managers have paid great attention to the research of coal mining cost. Related studies suggest that the existing mechanism for coal cost is unreasonable, and come up with the accounting system for full coal cost [1-2]. Academician Qian Minggao (2007) [3], based on the status and characteristics of China s coal industry, put forward the concept of scientific mining, and argued it is an essential requirement for the realization of scientific mining to carry out coal full cost. Zheng Aihua et al (2008) [4] analyzed the guarantee system for the implementation of full cost. However, the present research on the systems and mechanisms is just qualitative discussion ---proposals based on phenomenon, lacking mechanism analysis on policy responses to achieve full cost of coal. In this paper, we analyze the economic behavior of coal mining mainly based on the opportunity cost and resource value theory in economics. Our purpose is to find out how the policy mechanisms can be applied to achieve full cost of coal. 2. Cost constitutes of coal resources L. Ai-bin et al. / Procedia Earth and Planetary Science 1 (2009) China s current cost constitutes of coal At present, the cost calculation of coal products is based on the original cost accounting methods developed by the Department of Energy in Elements of the current coal cost is the direct cost of coal production, including materials, power, wages and staff welfare costs, repairs, ground subsidence costs, safety costs, maintenance costs, other expenses, depreciation, amortization expenses, interest payments. From the list we can be see, although there are some safety and environmental protection costs, the current costs that relate to the resources value consumption and environmental compensation have been not adequately extracted, with the obvious "non-full-cost" characteristics Coal cost based on the full cost system The so-called full cost, according to the theory of resources value, is a concept of resources and product cost, which has great practical guiding significance to fully compensate the utilization and consumption of resources. Full cost of coal mining refers to the sum of all costs spent on the scientific exploration and rational use of coal resources, is the true cost the whole society has to pay for the use of coal resources. Full cost should include three parts: first, production costs, that is, the direct expenditures on resource exploration, mining, processing. Second, compensation costs of resources depletion (inter-generational cost), also known as user cost, is mainly the direct compensation to the value of coal resources. Third, the external cost, mainly used to compensate and eliminate damage of coal mining to the environment, is to establish fund for production safety and conversion development etc Cost of coal production Production costs, based on the full cost system, refers to the cost of various production element consumed in the process of coal exploration and production. It can be divided into two parts: the input of human resources, material resources and financial resources in the exploration of coal, the correlative costs in the process of coal mining Exploration cost of coal resources

3 1688 L. Ai-bin et al. / Procedia Earth and Planetary Science 1 (2009) In China, the government is responsible for the costs of widely surveying and necessary detailed investigation of coal resources, while mining proprietor is responsible for detailed investigation and refined search. According to current experience, the cost of detailed investigation and refined search of coal resources is on average about 1 Yuan per ton. If recovery rate is estimated at 50%, the exploration cost of per ton coal resources is about 2 Yuan, but the existing coal cost accounting system did not reflect the cost of the above Cost for mining rights China s current use of mineral resources is not gratuitous and mining owners have to pay a fixed price for their mining rights to obtain mining permits. Due to the differences in the type of coal and the region, the Land and Resources Departments of different provinces in China transfer coal mining rights at different prices. In accordance with recorded price of mining rights in 2006, the sale price of exploitable reserves of coal is 2 to 6 Yuan per ton. China s current coal cost accounting system also does not reflect the cost of mining rights Direct production costs Direct production costs refers to the pre-requisite expenses to maintain the regular operation of enterprises, including manufacturing costs and process cost, and actually it is the main part of the original of direct production costs. Manufacturing cost includes the production materials, wages and welfare costs, power consumption, mine engineering costs, equipment depreciation, cost of repairing equipment and facilities, and input to maintain the natural reproduction and other inputs needed for production, etc.; process cost includes the cost of sales, management expenses, financial costs and so on User Cost of Coal User cost of coal resources, in fact, is the compensation for the depletion of coal resources, which in China includes resource tax, compensation for mineral resources, and compensation for mining rights and so on. In China s major coal production areas, namely in Shanxi, Shaanxi and Inner Mongolia, resource tax of coal is 3.2 Yuan per ton, while the resource taxes of coal of the main coal-producing provinces across the country are all over 2 to 3 Yuan per ton. Compensation for mineral resources is levied ad valorem that is proportioned with the sales revenue of coal production. The current rate of compensation in China is 1% External Costs External costs refers primarily to expenditures on improving the environment in mining areas, on safe production of coal mine and development cost, etc. With the sustainable development of economy and society, there re growing requirements for resources, safety and environment. As a result external costs will be getting higher and higher Environmental cost Divided into environmental prevention cost and environment damage cost, environmental cost is mainly spent to compensate and eliminate the damage to the environment caused by resource exploitation. Environment prevention cost is defined as the cost needed either before or in the process of coal production to draw up and implement environmental protection measures, build and operate environmental protection project and facilities to achieve the goal of environmental protection and resources conversation. The cost of environmental damage is defined as the internal losses and external losses of an enterprise, caused by environmental damage and resource depletion. According to the research report released by Chinese Coal Industry Association, China s current environmental cost for coal mining is about 14 Yuan per ton. However, the existing environmental cost only includes the compensation for collapse, accounting for a very small percentage Safety cost Safety cost is necessary expenditures to ensure the safety of mine workers and security of coal assets during the process of coal mining. It mainly includes safety damages, cost of safety precautions and safety engineering expenditures. According to different safety requirements in different mines, China s current extraction safety for cost of coal production is 3 to 15 Yuan per ton.

4 L. Ai-bin et al. / Procedia Earth and Planetary Science 1 (2009) Development cost Development cost is defined as necessary expenses to deal with the shutting down, the closure and bankruptcy, and stopping production of coal enterprises, as well as business conversion and business restructuring. Development cost includes conversion fund, the fund for the introduction of new products, the spending for workers placement, the compensation for workers for revoking labor contracts, costs for the recovery and transfer of mines assets other costs incurred. According to estimates, a fund for development and conversion of coal enterprises is 12 Yuan per ton on average. A difference in the demand of various coal enterprises is obvious. It s relatively proper to charge 5 to 15 Yuan for a ton of coal. 3. Economic analysis of coal mining based on full cost Considering from the perspective of full cost, analysis on the relationship between coal mining quantity and price using the theory of opportunity cost and resources value in economics can provide standards and theoretical reference for enterprises to implement the policy of full cost. Suppose that NSB represents the net social benefit, P represents resource price, Q represents the output, C (Q),C 1 (Q),C 2 (Q),C 3 (Q) represents the full cost, production costs, user (depletion) cost, and external cost in coal mining respectively, then the formula can be expressed as follows: ( Q) C ( Q) + C ( Q) C ( Q) C = (1) ( Q) C ( Q) C ( Q) NSB = P Q - C1 2 (2) 3 The first-order condition for the maximal NSB is: ( Q) Q C ( Q) Q C ( Q) Q 0 P Q Q + P C = If full cost is not considered, the first-order condition for the maximal net private profit is: ( Q) Q 0 P Q Q + P C1 = (4) Compare formula (3) and (4), we can see that the difference between the situation in considering the full cost and in only considering the cost of production is decided by C 2 (Q)/ Q+ C 3 (Q)/ Q. The theory of marginal opportunity cost to set coal price is based on the economics perspective of resources and environment, and is a useful tool to abstract and evaluate the consequences of resources utilization from an economic perspective. Marginal Opportunity Cost (MOC) constitute of three parts: Marginal Production Cost (MPC), Marginal User Cost (MUC) and Marginal External Cost (MEC). In perfectly competitive markets, P should be equal to its MOC, if expressed by formula it is: P=MOC=MPC+MUC+MEC (5) In accordance with the framework of MOC, as a non-renewable resource, MOC (social value) of coal should also contain MUC, namely the lost benefits of future users caused by one more unit exploitation of coal as well as MEC, namely the inevitable damage and pollution to environment caused by coal mining or the depleted resources of environmental capacity and the capital investment for production safety and conversion development. The framework of MOC completely reflects the social costs of resources, and is of great significance for the rational use and optimal allocation of resources [5]. As can be illustrated by Fig.1 in which the horizontal axis represents the output of coal, the vertical axis is the price or cost, and DD is the demand curve. As the present resources cost does not include MEC and MUC, equivalent to the MPC in the fig. 1, when the balance point between production and consumption in the A 1, the corresponding output is Q 1, price is P, and MPC is less than the MOC. Therefore, in fact, the enterprise is producing coal when P is below MOC, with the result that the consumption of resources and the environment value have not been duly compensated, leading to a high degree of waste of coal, and at the same time, the enterprise loans too much for production safety and conversion development in the process of coal mining. All in all, the level of coal (3)

5 1690 L. Ai-bin et al. / Procedia Earth and Planetary Science 1 (2009) exploration and utilization remains at a relatively low level. If the marginal cost curve is (MPC + MUC), it cuts the DD'in point of A 2, where the output of coal is Q 2, and the price P 2 is far below that of the point B in the MOC curve, so the resulted external costs, A 2 A 3 B, is assumed by the society. If the MEC and MUC are included, the marginal cost curve is the MOC, then the corresponding resource price ascends to P 3, and the output falls to Q 3. At this time the price equals to its MOC, the production comes to the Pareto optimal state in terms of the allocation of resources, and external costs is included in the mining cost of coal, the compensation for the depletion of coal has also been increased. As a result, on the one hand, environment damage has the sources of fund and will be compensated, the special fund for safety in production and development fund for conversion are ensured. On the other one hand, a complete and reasonable price system will help to stimulate enterprises to improve technology, reduce costs and promote the protection and reasonable exploration of resources. MOC of coal reflects the full cost that the society has to pay for exploiting a unit of coal. Here the theoretical price of coal includes the full cost of coal mining, and becomes a price of social efficiency. However, the existence of coal mining externality will make the allocation of resources under the condition of perfectly competitive market deviate from the Pareto optimal state. In other words, even if the economy is completely competitive, but because of the existence of externalities, the whole resources allocation of the economy can not meet the Pareto optimal state, so the invisible hand is at the state of malfunction. Therefore, it is not enough to depend on the market forces alone to achieve the full cost of coal, the government is needed to ensure that the market mechanism plays its role effectively through intervention of making policies and systems. P/C D MOC P 3 P 2 A 3 B A 2 MUC+MPC MPC P 1 A 1 O Q 3 Q 2 Q 1 Q Fig. 1. Analysis of coal mining quantity and price 4. Mechanisms for the realization of coal full cost The realization of full cost means that various costs for coal mining are compensated. The establishment of cost compensation mechanism shows that the coal prices are sufficient to cover the costs Market price system [4] Market price system of coal is a kind of price formation system by which coal price is co-decided by supply and demand, and at the same time, macro-controlled by the government. It is gradually established through the internalization of external costs, enterprises sharing of social costs, full cost based and market-oriented. According to the above analysis, if enterprises intend to exploit coal resources under full cost, the market must meet the necessary price. Otherwise, it ll be difficult to achieve. And the reasonable price of coal should be based on the full cost of coal production, besides that the sum of taxes, and profit rate, which is not lower than the average level of society. Therefore, the establishment of market price mechanism is of great significance to achieve the full cost. From the implementation of non-full-cost pricing and the imperfect price system over so many years in China, the far-reaching effects on the coal industry from the unreasonable price of coal can also be seen. As can be seen from Table 1, due to the reality of non-full-cost in coal industry and the non-market of coal price, coal price only reflects

6 L. Ai-bin et al. / Procedia Earth and Planetary Science 1 (2009) the cost of coal production, yet it doesn t fully reflect the costs caused by market supply and demand, resource scarcity, environmental damage and the conversion development after the crocking up of mines. As a result, it has led to repeatedly large-scale losses through the industry. For example, before 2003, years of losses hampered the development of the coal industry, resulting in large sums of lack of investment in safety, environmental management, the conversion development as well as the low wages of workers in coal industry, the insufficient compensation for labor value, inadequate safety and security measures and so on. In recent years, China speeds up reforms in coal industry, including reform of the compensation system for the use of coal, tax reform for the coal import and export, marketization of electric power coal price and other measures. Therefore, domestic coal price has been rising rapidly for the double factors of cost pushing and demand driving. With the rise of coal prices, cost of coal is gradually compensated, industry profit increases, and capital to solve the lack of safety investment increases. In one word, the safety situation in the coal industry has ameliorated year after year. This further indicates that price is of great importance to the realization of full cost. However, in the entire industrial chain of national economy, the coal industry is the basis, of a direct impact on the functioning of important industries such as electric power, metallurgy, chemicals, and building materials, and thus affecting the overall operation of the national economy. Therefore, it is necessary for the government to limit the coal price in a certain period of time. In order to keep the healthy development of the national economy, during the time of the implementation of pricing control, government may make some economic policies, such as tax breaks, subsidies and so on for coal enterprises. In the time of rising coal price, the timely launch of full cost for coal resources not only can internalize the external costs so that the original uneconomical external costs can be compensated, but also is of great significance for the sustainable development of the coal industry, as well as for the stable, harmonious and sustainable development of whole national economy. Table 1. Raw coal costs, price and profit of major state-owned coal mines in China

7 1692 L. Ai-bin et al. / Procedia Earth and Planetary Science 1 (2009) Year Raw coal costs(yuan/t ) * * Average selling price of commodity coal (Yuan/t ) Balance(subsidies before)(billion) Date source: Network of industry research report, * coal preparation 4.2. Government supervision mechanism Government supervision mechanism means that the government strengthens the supervision to the exploration of coal resources and carries out effective guidance and control through the establishment of related industry policies and regulations, and through the adoption of economic and mandatory management measures, the externality of coal mining that results in the malfunction of market is eliminated, the market and price once again becomes an effective means of allocating resources The adequate compensation for the value of the coal resources [6] To raise the standard of some resources taxes It s necessary to appropriately improve the rate of coal compensation, and tries to build the system of floating rates for coal compensation to completely reflect the state s proceeds right to the assets of resources. At the same time, we should properly increase mining royalties and improve the mechanism of yearly increase of the mining royalties. It is also necessary to increase resource tax, levied ad valorem instead according to the quantity To reform the tax system for coal resources We can establish the resources taxation system with royalty as the core, by referring to the international practice. First, to collect the royalty by the combination of compensation tax for coal resources and resources tax and to increase appropriately the level of royalty rates from the current average 1.18% to 8%. Second, to change prospecting and mining rights price into charge for leasing mining rights. Third, to change prospecting and mining rights user cost into mining rent. Prospecting and mining rights equal to a minimum royalty, whether conducting exploration activities or not, as long as mining rights is possessed, tax should be imposed to prevent the mining rights from being idle Increase the extraction of the cost of external management To improve the charge system for sewage The existing charge system for sewage, as a result of low charging, inadequate incentives, coupled with the nonmarket and less transparency of China s coal price formation mechanism and other reasons, makes that the cost of China s coal resources does not fully reflect the value of resources, and coal price doesn t fully reflect the environmental cost. Emissions trading system is of an important measure and of an effective way to improve environmental pollution, to reduce the negative externalities of resource exploration. Government should issue the implementation approach and related policies for total control on coal contaminants as soon as possible, and reform the policy of paid access to the emission right to form the primary market of emission right by bidding, auction or government price etc. At the same time, government should make clear regulation about the trading range and mode in the secondary market for emission rights trading to ensure that the emission right in the secondary market can be a normal transaction. Furthermore, government should establish corporate incentive mechanism and provide support in terms of capital, taxation, technology and so on for enterprises that actively try to reduce emissions and sell emission rights To improve the long-term mechanism for the investment in production safety

8 L. Ai-bin et al. / Procedia Earth and Planetary Science 1 (2009) We should increase the extraction of safety costs and normalize the use of safety costs. In accordance with the principle of corporate responsibility, government support, we can improve the mechanism that the local government and coal enterprises co-operate to increase investment in coal mine safety, through which we can establish a longterm investment mechanism for coal mine safety facilities, to establish a stable funding channels for safety To establish transferring funds system for exhausted coal mining enterprises Speed up the policy implementation of shutting down and going bankrupt of the state-owned large and mediumsized coal mines that are exhausted in resources and hopeless in getting rid of insolvency. It is proposed to specially set up transferring funds for exhausted coal mining enterprises, to provide policy support for these enterprises to achieve the smooth transfer of business and properly solve problems left over from the closure and bankruptcy of coal mines. At present, China has introduced some policies and related measures are also in the pipeline. In September 2006, the State Council approved eight main coal producing provinces or regions as experimental units for the system reform of charging for coal resources, carrying out the system of charging for the transfer of prospecting and mining rights of coal resources. For example, resource tax of coal will be increased from 0.3~0.5 Yuan per ton to 2.5~4.0 Yuan per ton, the average coal price is 6 Yuan per ton, the threshold for compensation charge increased from the 1% of income to 3% ~ 6% of income, and safety cost is 19 Yuan per ton. The State Council agreed that, from 2007coal industries in Shanxi Province began to carry out the policy experiment of sustainable development. The main measures are to establish a comprehensive compensation for coal mining and a compensation mechanism to restore the ecological environment, to collect fund for the sustainable development coal industries, to extract deposit for the restoration and management of environment in mine areas at the rate of 10 Yuan per ton, and conversion development fund at the rate of about 5 Yuan per ton. According to Regulation for the integration of coal resources and the compensation for the use of coal resources in Shanxi Province, owners have to pay for user cost for mining rights, in addition to pay mining rights price in proportion with resource reserves. After the implementation of these policies, the coal cost of per ton will increase by nearly 70 ~ 80 Yuan. At the same time, establishment and implementation of these policies ensure the realization of full cost of coal, making the implementation of full cost scientifically workable. 5. Conclusions (1) It is of great significance for the sustainable development of the coal industry to scientifically define the constitute of the full-cost for the exploitation of coal resources, to set up a full-cost system for coal enterprises in order to make various costs including external costs fused into coal prices, including the user cost, environmental cost, safety cost as well as the development cost after resources depletion in the scope of coal mining cost accounting. (2) MOC of coal resources reflects the full cost paid by the whole society to exploit a unit of coal resources. At this time, the theoretical price of coal resources includes the full cost of coal mining, becoming a price of social efficiency, reflecting the true value of coal resources and achieving the Pareto optimal allocation of resources. (3) The realization of full cost means that various costs during the process of coal mining are compensated. A cost compensation mechanism is established to show that the coal price is sufficient to cover the costs. And market price system and government supervision mechanism are necessary to ensure the realization of full cost of coal. Acknowledgements

9 1694 L. Ai-bin et al. / Procedia Earth and Planetary Science 1 (2009) We are grateful for the financial support from the key discipline development project Coal industry strategy and safety management of the Third 211 Project of China University of Mining and Technology (CUMT), science and technology foundation of CUMT (NO. 2007B026), 2008 scientific research innovation project for graduates of Jiangsu provincial universities (NO.CX08B_042R) and 2008 opening research foundation for the State Key Laboratory of Coal Resources and Mine safety of CUMT (NO. 08KF05). References [1] J. Li, Discussion on cost of coal cost. Mining Technology, 6 (2006) [2] W. Zhang, S. Liu, On the composition of total cost coal. Express Information of Mining Industry, 465 (2008) [3] M. Qian, X. Miao, On scientized mining.journal of Mining& Safety Engineering, 25 (2008) [4] A. Zheng, Total cost system based on the scientized mining. Journal of China Coal Society, 33 (2008) [5] Z. Zhang, Theoretical basis on ecological-environmental Compensation of the Mineral Resources. Chongqin Environment Science, 19 (1997) [6] W. Liu, Cost absence of coal resource and its compensation policy. Reform, 7 (2007)